15+ Years of

Rising Interest Rates?

DYI:  As chief cook and bottle washer of this blog I’ve been investing for 50 years – I’m 70 years old and how in the hell did THAT happen – IMO the secular decline for interest rates that began 9-30-1981 with 10 year T-bonds at 15.84% ended 8-4-2020 with 10 year T-bonds at %0.52!

From now on as we move through the business cycles during growth periods will experience higher highs and during recessions with HIGHER LOWS.

If history is any sort of guide we can expect rising rates in a saw tooth manner over the next 15+ years!  The Boomer’s created a worldwide savings glut that drove rates down (along with Fed interventions) to sub atomic low levels and maintained that for over two decades. 

That was then, this is now, until the Boomer generation has passed on (hey that’s me your talking about!) PLUS the Millennial generation move into their prime savings thus over whelming the small population of Generational X savings I wouldn’t expect any possible lessening of rates until 2040!

Please remember this will occur through the business cycles of higher highs then declines to higher lows.

Till Next Time    

Stock remain vastly overvalued; Gold is stand out value; Lt. term bonds yield is trading at their long term average!

 

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 1/1/25

Active Allocation Bands (excluding cash) 0% to 50%

30% - Cash -Short Term Bond Index - VBIRX

45% -Gold- Global Capital Cycles Fund - VGPMX **

 25% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

** Vanguard's Global Capital Cycles Fund maintains 25%+ in precious metal equities the remainder are domestic or international companies they believe will perform well during times of world wide stress or economic declines.

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Margin of Safety!

Central Concept of Investment for the purchase of Common Stocks.

"The danger to investors lies in concentrating their purchases in the upper levels of the market..."

Stocks compared to bonds:

Earnings Yield Coverage Ratio - [EYC Ratio]

Lump Sum any amount greater than yearly salary.

PE10  .........37.35
Bond Rate...5.31%

EYC Ratio = 1/PE10 x 100 x 1.1 / Bond Rate

2.00+ Stocks on the give-away-table!

1.75+ Safe for large lump sums & DCA

1.30+ Safe for DCA

1.29 or less: Mid-Point - Hold stocks and purchase bonds.

1.00 or less: Sell stocks - Purchase Bonds

0.50 or less:  Stock Market Crash Alert!  

Purchase 30 year Treasury Bonds! 

Current EYC Ratio: 0.55(rounded)

As of  1-1-25
Updated Monthly

PE10 as report by Multpl.com

Bond Rate is the rate as reported by

Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)

DCA is Dollar Cost Averaging.

Lump Sum is any dollar amount greater than one year salary.

Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss...If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety.  The danger to investors lies in concentrating their purchases in the upper levels of the market.....

Common Sense Investing:
The Papers of Benjamin Graham
Benjamin Graham

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%
Stocks & Bonds

Allocation Formula

1-1-2025
Updated Monthly

% Allocation = 100 x (Current PE10 – Avg. PE10 / 4)  /  (Avg.PE10 x 2 – Avg. PE10 / 2)]

Formula's answer determines bond allocation.

Current PE10.....37.35

Avg. PE10...........17.19

Core Bond Allocation:  128% 

% Stock Allocation     0% (rounded)
% Bond Allocation  100% (rounded)

Current Asset: Vanguard Long-Term Investment Grade Bond Fund   

Logic behind this approach:

--As the stock market becomes more expensive, a conservative investor's stock allocation should go down. The rationale recognizes the reduced expected future returns for stocks, and the increasing risk. 

--The formula acknowledges the increased likelihood of the market falling from current levels based on historical valuation levels and regression to the mean, rather than from volatility. Many agree this is the key to value investing.  

Please note there is controversy regarding the divisor (Avg. PE10).  The average since 1881 as reported by Multpl.com is 16.70.  However, Larry Swedroe and others believe that using a revised Shiller P/E mean of 19.6 , the number since 1960 ( a 53-year period), reflects more modern accounting procedures.

DYI adheres to the long view where over time the legacy (prior 1959) values will be absorbed into the average.  Also it can be said with just as much vigor the last 25 years corporate America has been noted for accounting irregularities.  So....If you use the higher or lower number, or average them, you'll be within the guide posts of value.

Please note:  I changed the formula when the Shiller PE10 is trading at it's mean - stocks and bonds will be at 50% - 50% representing Ben Graham's Defensive investor starting point; only deviating from that norm as valuations rise or fall.

Current Allocation:

Vanguard Long Term Investment Grade Bond Fund

Possible Allocations to Bonds vs Stocks:

Bonds %

100%+  Vanguard Long Term Investment Grade Bond Fund 

99% to 65% Wellesley Income Fund

64% to 35% 1/2 Wellesley Income Fund - 1/2 Wellington Fund

34% to 0%  Wellington Fund

  

DYI

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This site strives for the highest standards of accuracy; however ERRORS AND OMISSIONS ARE ACCEPTED!

The Dividend Yield Investor is a blog site for entertainment and educational purposes ONLY.

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Use this site at your own risk.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

The Formula.

A value based allocation strategy

February 19, 2010 by John Kingham

 

U.S. Stock Market

177% Above Trend Line

Massive Overvaluation

Returns From Here Will Be Subdued

 OR

Outright Losses Before Fee’s and Inflation

DYI:  Today’s U.S. stock market by whatever method for determining valuations is screaming that equities are poised for sub returns at best and worst outright losses before fee’s and inflation.  Monies invested today or stocks held today in a S&P 500 index fund or a generalized all stock growth fund that is found so prevalent in 401k’s – go to sleep like Rip Van Winkle waking 10 years in the future will have very subdued (less than 2%) or outright losses.

Dollar cost averaging is nothing more than very small monthly lump sum purchases.  Those dollars invested will reduce your overall return since valuations being at nose bleed levels.

Currently today IMO this is a terrible time to be buying stocks for the long term investors even if they are youngsters in their 20’s with many decades ahead.  Best to earn as much as possible in cash or short term bonds waiting for the next opportunity to purchase stocks at far more reasonable valuation levels.

DYI